Question

Briefly describe what information is contained in the Statement of Cash Flows.

Answer 1

WHAT IS A CASH FLOW STATEMENT:

A cash flow statement is a statement that summarizes the changes in the amount of cash and cash equivalents due to changes in balance sheet accounts and income accounts.

The cash flow statement reflects the company's liquidity position.It shows how efficiently a company manages its cash and how efficiently it generates cash for debt and expenses payment.The cash flow statement has been made a mandatory statement in the financials of the company.

The cash flow statement uses cash basis accounting instead of accrual basis accounting

PURPOSE:

The purpose of the cash flow statement is to show where an entities cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over a specific period of time (usually quarterly and annually). It is important for analyzing the liquidity and long term solvency of a company.

Three main categories contained in the cash flow statement are:

i. Cash from operating activities

ii. Cash from investing activities

iii.Cash from financing activities

Operating activities:

The operating activities on the CFS include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from a company's products or services.Example Receipts from Sales,Interest and rent payments.

Cash flow from operations is an important measurement because it tells the analyst about the viability of an entities current business plan and operations. In the long run, cash flow from operations must be cash inflows in order for an entity to be solvent and provide for the normal outflows from investing and finance activities.

Example:

1.Net earnings

2.Depreciation & Amortization

3.Cash from Operations

Investing Activities:

Investing activities include any sources and uses of cash from a company's investments. A purchase or sale of an asset, loans made to vendors or received from customers or any payments related to a merger or acquisition are included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.

Example:

1.Investments in Property

2.Cash from Investing

Financing Activities:

Cash from financing activities include the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Payment of dividends, payments for stock repurchases and the repayment of debt principle (loans) are included in this category.

Example:

1.Issuance/Repayment of debt

2.Issuance/Repayment of equity

3.Cash from Financing

Cash Balance:

The last section on the statement of cash flows is a reconciliation of the total cash position, which connects to the balance sheet. This is the final piece of the puzzle when linking the three financial statements.

A cash flow statement is a valuable measure of strength, profitability for a company. The CFS can help determine has liquidity or cash to pay its expenses. A company can use a cash flow statement to predict future cash flow, helps in matters of budgeting.

For investors, the cash flow statement reflects a company's financial health since typically the more cash that's available for business operations, the better. However, this is not a hard and fast rule. Sometimes a negative cash flow results from a company's growth strategy in the form of expanding its operations.

SUMMARY:

The cash inflows and cash outflows in the cash flow statement are segmented into cash flow from operations, investing, and financing. These details provide insight in the liquidity and solvency, as well the entities ability to meet future needs for capital and growth.